What is a public float?

Posted on: April 8th, 2022
By: Tadeo Lemus

A stock float can mean a variety of things. For example, a stock float refers to the number of shares that are available to the public.

Second, stock promotion may refer to the act of putting a firm on a stock exchange, which is also known as launching a company. So placing a business public means floating it, as in an initial public offering.

What is a stock float, and what does it signify for investors?

How stock float works

The total number of shares that can be bought and sold by the general public is known as a company’s stock float. It might be expressed in absolute terms, such as 10 million shares, or it might occasionally be presented as a proportion of the firm’s overall outstanding shares.

A company may have 100 million outstanding shares, but only 75 million of those shares are available to the public. So the float is 75 million or 75% of the total outstanding shares.

So, what is not included in a stock’s float?

  • Stock owned by insiders of the company
  • Any shares held that are part of the company’s own books
  • Restricted stock shares that prevent the owner from selling it in a specific period of time

To summarize, any unlisted share could be excluded from the float.

A firm may also have some other nuances in classifying the stock as floated. Investors may modify their own calculations of the float down based on the following points:

  • When an investor has enough stock to necessitate a quarterly SEC filing, it is generally more than 5% of the outstanding shares.
  • If a big long-term investor or someone designated as an insider has bought the stock and has no desire to sell it,

These computations are based on the idea that similar to insiders with restricted stock, these investors are unlikely to sell their shares and can only do so if they notify the public of their sales. As a result, investors may believe that these shares are effectively locked up for at least the short run.

Why investors put importance into stock floats

The float is important to investors because it indicates how much stock is available for trading. At critical periods, such as a potential short squeeze, this data may be quite significant.

However, it’s also important because it reveals the firm’s ownership structure and gives hints about how a firm may proceed in the future if necessary.

Because of the restricted supply, stocks with a smaller float will be more volatile in the near term than those with a larger float. Investors may demand more shares than are available, resulting in an increase in price.

In addition, the same principles apply in reverse. This implies that if interest for the stock drops dramatically, the price of the stock could plummet even more.

The stock float was a significant contributing factor to the 2021 GameStop short squeeze. In the year preceding the squeeze, GameStop had been repurchasing its own stock, lowering the float. At about this time, many investors were selling GameStop’s shares short in anticipation of a downturn in value.

At some point, the low float and numerous short-sellers triggered a situation in which shorts had to repurchase more stock than was available in the float, pushing the stock upward.

Second, the corporate structure may reveal investors’ attitudes. A large public float, for example, is often taken as a sign that shareholders will vote in favor of a buyout at a higher price.

High insider ownership, on the other hand, might signal a completely different attitude toward investors’ proposals and shareholder votes. High insider ownership may also suggest greater alignment with a company’s long-term goals for success rather than those seeking quick profits.

Finally, if a firm sells treasury shares into the market to raise money (perhaps as a result of a stock repurchase), it may do so. It may not be necessary to grant additional authorization for more capital to be raised. The shares become outstanding and are included in the float.

Difference between high and low stock float

A company that wants to raise money through an initial public offering (IPO) typically sells a fraction of its outstanding shares, and some of the shares it does sell are subject to insider trading restrictions. The Robinhood IPO, for example, sold roughly 7% of the company’s stock.

The smaller float may be caused by different reasons, but these are common ones:

  • Because the market may not be able to handle all of the outstanding shares, the underwriters choose to sell only a portion of them.
  • Insiders are unwilling or unable to sell all of their shares during the IPO.
  • A smaller float may help push the stock higher than a larger float, since the IPO may be able to attract a more limited number of investors who are more enthusiastic about the investment.

It’s also worth noting that an initial offering price can act as a psychological barrier for a stock, helping to maintain the value over a longer period of time.

Difference between float, outstanding shares, and authorized shares

Depending on a firm’s position, the stock can be divided into a few distinct categories:

  • Authorized shares: The number of shares the firm may issue under its charter is shown by authorized shares. Only allowing a business to sell the stock if it needs to do so in the future gives it the authority to do so. A company might have a lot of authorized shares but not intend to make them available. Specifying the number of authorized stocks protects investors against uncontrolled stock issuance.
  • Outstanding shares: Outstanding shares represent how many shares exist. This includes any offered to the general public as well as any granted to other stakeholders.
  • The float indicates how many shares are available for purchase and sale by the general investing public. It does not include, among other things, restricted stock held by executives. However, if insiders sell their stock in the market, later on, it becomes a part of the float.

To put it another way, the number of authorized shares is always greater than the number of outstanding shares.

What to take away

It’s critical for investors to understand the stock float, especially since it can be significant in certain situations and during the short term.

In contrast, the fundamental performance of a business over time is generally what drives stock prices.

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